Tenet Critics Taking Aim at Costly Buybacks

Tenet's ( THC) spending habits, long the subject of scorn from a group of devoted critics, are coming under fresh attack.

But this time, the naysayers include a noted company bull, and the ire is focused on an outlay that Wall Street often goes out of its way to praise. Tiring of the company's hefty losses and failure to deliver a timely turnaround, Tenet watchers are now questioning the prudence of Tenet's stock-buyback plan.

In a contentious earnings call Wednesday morning, outspoken fund manager Lee Cooperman of Omega Advisors harshly questioned managers at the big hospital chain for spending hundreds of millions of dollars on company stock even as they back away from earnings guidance. Cooperman's comments came as a surprise in part because in the past he has urged the company to buy back stock when it looked cheap. Meanwhile, a pair of analysts challenged Tenet's decision to pour its dwinding cash flow into shares it has clearly overpaid for in the past.

Tenet bulls were evidently unfazed by the developments, pushing the stock up 43 cents to $16.50 Wednesday. But with shares 68% below their year-ago high, Wednesday's session clearly caught the company's attention.

Falling Down

Dominating Wednesday's debate, Cooperman pressed Tenet to either offer some concrete earnings guidance, signaling that execs have a reasonable basis for valuing the stock, or quit throwing money into the market. The manager, whose fund is long Tenet stock, went on to criticize execs for doling out and then quickly abandoning an earnings forecast last December.

Back then, Tenet projected it could earn $2 a share by next year. Since then the company has offered only vague "preliminary" earnings guidance of $1.35 to $1.60 a share for 2003 and none at all for 2004.

Cooperman indicated Wednesday that Tenet has no business spending money on company stock if it has no idea what to expect in return. Instead, he suggested that Tenet consider spending the money on dividends -- so investors can shop around for better investments on their own. Tenet doesn't currently pay a regular dividend.

Fulcrum analyst Sheryl Skolnick, an early Tenet bear who actually upgraded the stock to buy in March, suggested the company really shouldn't be spending extra money at all right now. She pointed with alarm to Tenet's slumping first-quarter cash flow, knocked down two-thirds by extraordinary events that won't disappear overnight, and recommended that Tenet abandon its current buyback plans altogether.

Tenet stood its ground, however. Even after the attack by Cooperman, the company said it was "unwilling" to provide any firm guidance until it finalizes sweeping hospital reviews and tallies up the results toward the end of the current quarter.

Finally, Cooperman gave up.

"I'm sorry to give you a lecture, but I think I know what I'm talking about," he told management in frustration. And "what I'm hearing you say, frankly, is all wrong."

Agreement

Others have fretted over Tenet's spending habits as well. For example, some critics believe that Tenet should relocate its corporate headquarters away from the expensive resort town of Santa Barbara, Calif. They point out that very few public companies operate in the pricey coastal city, and that one of the biggest -- Fidelity National Financial ( FNF) -- just announced plans to leave the area because it could save so much money.

Fidelity's CEO explained to the Orange County Register last month that the cost of doing business there had, quite simply, become "oppressive."

Tenet has given no indication that it would consider a similar move, despite suggestions that the company's top executives should abandon their sunny surroundings and move closer to the primary administrative center in Dallas. Instead, the company has pledged to find ways to save $100 million -- and eventually more -- by cutting back elsewhere.

But Skolnick, for one, believes Tenet should be preserving all the cash it can right now. During Wednesday's call, she clearly hinted that Tenet's stock buybacks should stop.

"Your balance sheet appears to be getting tighter and tighter," Skolnick said. "Is it really prudent for you to be going out and buying back stock?"

Waste Not, Want Not

During the latest quarter, Tenet spent $110 million -- an amount roughly equal to half its cash flow -- on company stock. At least one analyst hinted that Tenet may be wasting its money on the shares. He went on to point out that the company hasn't exactly been successful investing in its own stock in the past, noting that Tenet was buying back shares last year at levels double and triple the stock's recent price.

"How many shares have you purchased over the past two years at significantly higher prices?" the ETG analyst asked. "It was a lot ... The question of when you should be buying it is up in the air."

But Tenet said it bought stock for different reasons in the past. Instead of just trying to capitalize on a bargain, management said, the company was primarily offsetting the dilution created by the issuance of stock options.

John Ransom, an analyst at Raymond James, questioned whether Tenet is paying too high a price to offset the potential dilutive effect of employee stock options that -- in many cases -- will probably wind up worthless, given the stock's steep decline over the last year.

"You're carrying a pretty heavy penalty for options that are pretty out of the money," he said. And "it's not providing an incentive to anybody."

Although Tenet acknowledged as much, the company said it plans to keep its new options strategy in place. Meanwhile, the company's old options plan has already made some Tenet executives quite rich. CEO Jeffrey Barbakow, by himself, cleared more than $100 million by cashing in valuable stock options ahead of Tenet's crash last year. Since then, Tenet President Trevor Fetter has raked in a pile of options and restricted stock that could pay off dearly as well.

Cooperman reminded Tenet executives Wednesday of their good fortune.

"You get all these options and fancy compensation," he said. "I hope you wind up earning and deserving it."

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